The New Bailout Begins: Eminent Domain Is Upon Us

While one can have sympathy for the over-levered, underwater homeowners that took free-money with both hands and feet as house prices surged in the mid-2000s (just like they are now) but the latest moves to ‘save’ people from themselves in the city of Richmond, CA is raising both market and constitutional concerns. As NYTimes reports, the city is the first to use eminent domain by the local government (in partnership with a ‘friendly’ mortgage provider) to seize homes, force investors to take a loss on the mortgages, re-issue a new ‘lower’ mortgage, and allow the homeowner back with positive equity (ready to lever-it-back-up into a new Harley). As Guggenheim notes, this is likely to hurt supply of new mortgages and as we noted previously (here and here), it seems clear that private-label MBS holders will not be happy, consumers hurt as mortgage costs would rise (this ‘risk’ has to be priced in), and taxpayers unhappy as this is yet another transfer payment scheme to bailout underwater loans.